role of it in stock markets

CHAPTER 1

INTRODUCTION

The Financial system constitutes of the money market and capital market.

The capital market facilitates the transfer of small and scattered savings of the

household sector into productive investment. It helps in financing the activities of

corporate entities. Government and Public Sector organization. The capital market

provides liquidity, marketability and the safety of investments to the investors.

Properly organized and regulated capital market provides scope for substantial

development for an economy, through the availability of long term funds, in

exchange of financial securities.

Stock markets refer to a market place where investors can buy and sell

stocks. The price at which each buying and selling transaction takes is determined

by the market forces (i.e. demand and supply for a particular stock).

A stock exchange is a corporation or mutual organization which provides

"trading" facilities for stock brokers and traders, to trade stocks and other

securities. Stock exchanges also provide facilities for the issue and redemption of

securities as well as other financial instruments and capital events including the

payment of income and dividends. The securities traded on a stock exchange

include: shares issued by companies, unit trusts, derivatives, pooled investment

products and bonds. To be able to trade a security on a certain stock exchange, it

has to be listed there. Usually there is a central location at least for recordkeeping,

but trade is less and less linked to such a physical place, as modern markets are

electronic networks, which gives them advantages of speed and cost of

transactions. Trade on an exchange is by members only. The initial offering of

stocks and bonds to investors is by definition done in the primary market and

1

subsequent trading is done in the secondary market. A stock exchange is often the

most important component of a stock market. Supply and demand in stock a

market is driven by various factors which, as in all free markets, affect the price of

stocks (see stock valuation).

Let us take an example for a better understanding of how market forces

determine stock prices. ABC Co. Ltd. enjoys high investor confidence and there is

an anticipation of an upward movement in its stock price. More and more people

would want to buy this stock (i.e. high demand) and very few people will want to

sell this stock at current market price (i.e. less supply). Therefore, buyers will have

to bid a higher price for this stock to match the ask price from the seller which will

increase the stock price of ABC Co. Ltd. On the contrary, if there are more sellers

than buyers (i.e. high supply and low demand) for the stock of ABC Co. Ltd. in the

market, its price will fall down.

In earlier times, buyers and sellers used to assemble at stock exchanges to

make a transaction but now with the dawn of IT, most of the operations are done

electronically and the stock markets have become almost paperless. Now investor’s

don’t have to gather at the Exchanges, and can trade freely from their home or

office over the phone or through Internet.

There is usually no compulsion to issue stock via the stock exchange itself,

nor must stock be subsequently traded on the exchange. Such trading is said to be

off exchange or over-the-counter. This is the usual way that derivatives and bonds

are traded. Increasingly, stock exchanges are part of a global market for securities.

A stock exchange is also known as the share market or the bourse is mutual

organization or a corporation which mainly provides facilities for stock brokers

and for various traders. A stock exchange helps traders or members to trade

2

company stocks and various other securities. Stock exchange also provides various

facilities for the issue and redemption of different securities. Stock Exchange is a

place where anyone with money in his pockets can trade for shares. The Basic way

of trading on the stock exchange is to open an account with a broker who has a

ticket to trade on behalf of her customers on stock exchange. You can open your

account with the broker either by submitting the required amount of money or

shares or stocks whatever you call it. Every broker has different requirements for

opening an account with different requirements for amounts of money that can be

deposited into the account.

Broker trade on behalf of you by taking your orders mostly on phone for any

stock you want to trade and in return charges a certain amount of commission.

There are two different kinds of brokers. One who simply trade on behalf of you

and others are called dealers which are also called market makers. a market maker

is a person who at the end of day matches cost at which you purchased your shares

and their day end prices. if day end prices are higher than the cost at which you

purchased your shares, he will issue a margin call for depositing the necessary

funds to level your funds with the price of your shares.

A stock market is a public market for the trading of company stock and

derivatives at an agreed price; these are securities listed on a stock exchange as

well as those only traded privately. The size of the world stock market was

estimated at about $36.6 trillion US at the beginning of October 2008. The total

world derivatives market has been estimated at about $791 trillion face or nominal

value, 11 times the size of the entire world economy. The value of the derivatives

market, because it is stated in terms of notional values, cannot be directly

compared to a stock or a fixed income security, which traditionally refers to an

actual value. Moreover, the vast majority of derivatives 'cancel' each other out (i.e.,

3

a derivative 'bet' on an event occurring is offset by a comparable derivative 'bet' on

the event not occurring.). Many such relatively illiquid securities are valued as

marked to model, rather than an actual market price.

DEFINITION

According to the Securities Contracts (Regulation) Act, 1956, an exchange

is defined as, “any body of individuals, whether incorporated or not, constituted for

the purpose of assisting, regulating or controlling the business of buying, selling or

dealing in securities”. The SCR Act stipulates that a stock exchange must be

recognized by the government of India.

Thus, Stock Exchanges are a structured market place for the proper conduct

of trading in company stocks and other securities. The stock exchanges provide

services to the investors and facilitate the issue and redemption of securities and

other financial instruments.

CHAPTER 2

4

HISTORY

HISTORY OF STOCK MARKET IN THE WORLD

In 12th century France the courratiers de change were concerned with

managing and regulating the debts of agricultural communities on behalf of the

banks. Because these men also traded with debts, they could be called the first

brokers. A common misbelieve is that in late 13th century Bruges commodity

traders gathered inside the house of a man called Van der Beurze, and in 1309 they

became the "Brugse Beurse", institutionalizing what had been, until then, an

informal meeting, but actually, the family Van der Beurze had a building in

Antwerp where those gatherings occurred; the Van der Beurze had Antwerp, as

most of the merchants of that period, as their primary place for trading. The idea

quickly spread around Flanders and neighboring counties and "Beurzen" soon

opened in Ghent and Amsterdam.

In the middle of the 13th century, Venetian bankers began to trade in

government securities. In 1351 the Venetian government outlawed spreading

rumors intended to lower the price of government funds. Bankers in Pisa, Verona,

Genoa and Florence also began trading in government securities during the 14th

century. This was only possible because these were independent city states not

ruled by a duke but a council of influential citizens. The Dutch later started joint

stock companies, which let shareholders invest in business ventures and get a share

of their profits - or losses. In 1602, the Dutch East India Company issued the first

share on the Amsterdam Stock Exchange. It was the first company to issue stocks

and bonds.

5

The Amsterdam Stock Exchange (or Amsterdam Beurs) is also said to have

been the first stock exchange to introduce continuous trade in the early 17th

century. The Dutch "pioneered short selling, option trading, debt-equity swaps,

merchant banking, unit trusts and other speculative instruments, much as we know

them". There are now stock markets in virtually every developed and most

developing economy, with the world's biggest markets being in the United States,

UK, Japan, China, and Germany.

History & Growth of Stock Exchange in India:

In 1860, the exchange flourished with 60 brokers. In fact the 'Share Mania'

in India began when the American Civil War broke and the cotton supply from the

US to Europe stopped. Further the brokers increased to 250.

At the end of the war in 1874, the market found a place in a street (now

called Dalal Street). In 1887, "Native Share and Stock Brokers' Association" was

established. In 1895, the exchange acquired a premise in the street which was

inaugurated in 1899.

The working of stock exchanges in India started in 1875. BSE is the oldest

stock market in India. The history of Indian stock trading starts with 318 persons

taking membership in Native Share and Stock Brokers Association, which we now

know by the name Bombay Stock Exchange or BSE in short. In 1965, BSE got

permanent recognition from the Government of India. National Stock Exchange

comes second to BSE in terms of popularity. BSE and NSE represent themselves

as synonyms of Indian stock market. The history of Indian stock market is almost

the same as the history of BSE.

6

The 30 stock sensitive index or Sensex was first compiled in 1986. The

Sensex is compiled based on the performance of the stocks of 30 financially sound

benchmark companies. In 1990 the BSE crossed the 1000 mark for the first time. It

crossed 2000, 3000 and 4000 figures in 1992. The reason for such huge surge in

the stock market was the liberal financial policies announced by the then financial

minister Dr. Man Mohan Singh.

The up-beat mood of the market was suddenly lost with Harshad Mehta

scam. It came to public knowledge that Mr. Mehta, also known as the big-bull of

Indian stock market diverted huge funds from banks through fraudulent means. He

played with 270 million shares of about 90 companies. Millions of small-scale

investors became victims to the fraud as the Sensex fell flat shedding 570 points.

To prevent such frauds, the Government formed The Securities and

Exchange Board of India, through an Act in 1992. SEBI is the statutory body that

controls and regulates the functioning of stock exchanges, brokers, sub-brokers,

portfolio manager’s investment advisors etc. SEBI oblige several rigid measures to

protect the interest of investors. Now with the inception of online trading and daily

settlements the chances for a fraud is nil, says top officials of SEBI.

Sensex crossed the 5000 mark in 1999 and the 6000 mark in 2000. The 7000

mark was crossed in June and the 8000 mark on September 8 in 2005. Many

foreign institutional investors (FII) are investing in Indian stock markets on a very

large scale. The liberal economic policies pursued by successive Governments

attracted foreign institutional investors to a large scale. Experts now believe the

sensex can soar past 14000 marks before 2010.

7

The unpredictable behavior of the market gave it a tag – ‘a volatile market.’

The factors that affected the market in the past were good monsoon, Bharatiya

Janatha Party’s rise to power etc. The result of a cricket match between India and

Pakistan also affected the movements in Indian stock market. The National

Democratic Alliance led by BJP, during 2004 public elections unsuccessfully tried

to ride on the market sentiments to power. NDA was voted out of power and the

sensex recorded the biggest fall in a day amidst fears that the Congress-Communist

coalition would stall economic reforms. Later prime minister Man Mohan Singh’s

assurance of ‘reforms with a human face’ cast off the fears and market reacted

sharply to touch the highest ever mark of 8500.

India, after United States hosts the largest number of listed companies.

Global investors now ardently seek India as their preferred location for investment.

Once viewed with skepticism, stock market now appeals to middle class Indians

also. Many Indians working in foreign countries now divert their savings to stocks.

This recent phenomenon is the result of opening up of online trading and

diminished interest rates from banks. The stockbrokers based in India are opening

offices in different countries mainly to cater the needs of Non Resident Indians.

The time factor also works for the NRIs. They can buy or sell stock online after

returning from their work places.

The recent incidents that led to growing interest among Indian middle class

are the initial public offers announced by Tata Consultancy Services, Maruti

Udyog Limited, ONGC and big names like that. Good monsoons always raise the

market sentiments. A good monsoon means improved agricultural produce and

more spending capacity among rural folk. The bullish run of the stock market can

be associated with a steady growth of around 6% in GDP, the growth of Indian

companies to MNCs, large potential of growth in the fields of telecommunication,

8

mass media, education, tourism and IT sectors backed by economic reforms ensure

that Indian stock market continues its bull run.

Indian Stock Exchange Growth

1946 1961 1971 1975 1980 1985 1991 1995

No. of Stock

Exchanges7 7 8 8 9 14 20 22

No. of Listed

Cos.1125 1203 1599 1552 2265 4344 6229 8593

No. of Stock

Issues of

Listed Cos.

1506 2111 2838 3230 3697 6174 8967 11784

Capital of

Listed Cos.

(Cr. Rs.)

270 753 1812 2614 3973 9723 32041 59583

Market value

of Capital of

Listed Cos.

(Cr. Rs.)

971 1292 2675 3273 6750 25302 110279 478121

Capital per

Listed Cos.

(4/2) (Lakh

Rs.)

24 63 113 168 175 224 514 693

Market Value

of Capital per

Listed Cos.

86 107 167 211 298 582 1770 5564

9

(Lakh Rs.)

(5/2)

Appreciated

value of

Capital per

Listed Cos.

(Lak Rs.)

358 170 148 126 170 260 344 80

Today, there are 23 recognized stock exchange in India including the Over the

Counter Exchange of India for providing trading access to small & new

10

CHAPTER 3

INFORMATION TECHNOLOGY IN INDIA

Information technology in India is an industry consisting of two major

components: IT Services and business process outsourcing (BPO). The sector has

increased its contribution to India's GDP from 1.2% in 1998 to 7.5% in 2012.

According to NASSCOM, the sector aggregated revenues of US$100 billion in

2012, where export and domestic revenue stood at US$69.1 billion and US$31.7

billion respectively, growing by over 9% Information technology is playing an

important role in India today & has transformed India's image from a slow moving

bureaucratic economy to a land of innovative entrepreneurs.

The IT sector in India is generating 2.5 million direct employment.India is now one

of the biggest IT capitals of the modern world and all the major players in the

world IT sector are present in the country

The major cities that account for about nearly 90% of the sector's exports are

Bangalore, Chennai, Kolkata, Hyderabad, Trivandrum, Noida, Mumbai and Pune.

Bangalore is considered to be the Silicon Valley of India because it is the leading

IT exporter.[3][4] Exports dominate the industry and constitute about 77% of the total

industry revenue. However, the domestic market is also significant with a robust

revenue growth.[1] The industry’s share of total Indian exports (merchandise plus

services) increased from less than 4% in FY1998 to about 25% in FY2012.

According to Gartner, the "Top Five Indian IT Services Providers" are Tata

Consultancy Services, Infosys, Cognizant, Wipro and HCL Technologies.[5]

Regulated VSAT links became visible in 1994.[6] Desai (2006) describes the steps

taken to relax regulations on linking in 1991:

11

In 1991 the Department of Electronics broke this impasse, creating a corporation

called Software Technology Parks of India (STPI) that, being owned by the

government, could provide VSAT communications without breaching its

monopoly. STPI set up software technology parks in different cities, each of which

provided satellite links to be used by firms; the local link was a wireless radio link.

In 1993 the government began to allow individual companies their own dedicated

links, which allowed work done in India to be transmitted abroad directly. Indian

firms soon convinced their American customers that a satellite link was as reliable

as a team of programmers working in the clients’ office. Videsh Sanchar Nigam

Limited (VSNL) introduced Gateway Electronic Mail Service in 1991, the 64

kbit/s leased line service in 1992, and commercial Internet access on a visible scale

in 1992. Election results were displayed via National Informatics Centre's

NICNET.

The Indian economy underwent economic reforms in 1991, leading to a new era of

globalization and international economic integration. Economic growth of over 6%

annually was seen during 1993-2002. The economic reforms were driven in part by

significant the internet usage in the country. The new administration under Atal

Bihari Vajpayee 1999 govt pm—which placed the development of Information

Technology among its top five priorities— formed the Indian National Task Force

on Information Technology and Software Development.

Wolcott & Goodman (2003) report on the role of the Indian National Task Force

on Information Technology and Software Development:

Within 90 days of its establishment, the Task Force produced an extensive

background report on the state of technology in India and an IT Action Plan with

108 recommendations. The Task Force could act quickly because it built upon the

12

experience and frustrations of state governments, central government agencies,

universities, and the software industry. Much of what it proposed was also

consistent with the thinking and recommendations of international bodies like the

World Trade Organization (WTO), International Telecommunications Union (ITU),

and World Bank. In addition, the Task Force incorporated the experiences of

Singapore and other nations, which implemented similar programs. It was less a

task of invention than of sparking action on a consensus that had already evolved

within the networking community and government.

"The New Telecommunications Policy, 1999" (NTP 1999) helped further liberalize

India's telecommunications sector. The Information Technology Act 2000 created

legal procedures for electronic transactions and e-commerce.

Throughout the 1990s, another wave of Indian professionals entered the United

States. The number of Indian Americans reached 1.7 million by 2000. This

immigration consisted largely of highly educated technologically proficient

workers. Within the United States, Indians fared well in science, engineering, and

management. Graduates from the Indian Institutes of Technology (IIT) became

known for their technical skills. The success of Information Technology in India

not only had economic repercussions but also had far-reaching political

consequences. India's reputation both as a source and a destination for skilled

workforce helped it improve its relations with a number of world economies. The

relationship between economy and technology—valued in the western world—

facilitated the growth of an entrepreneurial class of immigrant Indians, which

further helped aid in promoting technology-driven growth

13

Recent development

The economic effect of the technologically inclined services sector in India—

accounting for 40% of the country's GDP and 30% of export earnings as of 2006,

while employing only 25% of its workforce—is summarized by Sharma (2006):

"Today, Bangalore is known as the Silicon Valley of India and contributes 33% of

Indian IT Exports. India's second and third largest software companies are

headquartered in Bangalore, as are many of the global SEI-CMM Level 100

Companies."[citation needed] Numerous IT companies are based in Mumbai, such as TCS

(among India's first and largest), Reliance,[disambiguation needed] Patni, LnT InfoTech,

Myzornis Corporation and i-Flex.

Thiruvananthapuram (Trivandrum), the capital of Kerala state, is the foremost

among the Tier II cities that is rapidly growing in terms of IT infrastructure. As the

software hub of Kerala, more than 80% of the state's software exports are from

here.[7] Major campuses and headquarters of companies such as Infosys, Oracle

Corporation, IBS Software Services and UST Global are located in the city. India's

biggest IT company Tata Consultancy Services is building the country's largest IT

training facility in Trivandrum—the project is worth INR10 billion and will have a

capacity of 10,000 seats. The completion of the facility is expected in 2014 or

2015.[8]

On 25 June 2002, India and the European Union agreed to bilateral cooperation in

the field of science and technology. A joint EU-India group of scholars was formed

on 23 November 2001 to further promote joint research and development. India

holds observer status at CERN, while a joint India-EU Software Education and

Development Center will be located in Bangalore

14

Employment

This sector has also led to massive employment generation. The industry continues

to be a net employment generator - expected to add 230,000 jobs in FY2012, thus

providing direct employment to about 2.8 million, and indirectly employing 8.9

million people.[1] Generally dominant player in the global outsourcing sector.

However, the sector continues to face challenges of competitiveness in the

globalized and modern world, particularly from countries like China and

Philippines.

India's growing stature in the Information Age enabled it to form close ties with

both the United States of America and the European Union. However, the recent

global financial crises has deeply impacted the Indian IT companies as well as

global companies. As a result hiring has dropped sharply, and employees are

looking at different sectors like the financial service, telecommunications, and

manufacturing industries, which have been growing phenomenally over the last

few years.[10] India's IT Services industry was born in Mumbai in 1967 with the

establishment of Tata Group in partnership with Burroughs.[11] The first software

export zone SEEPZ was set up here way back in 1973, the old avatar of the modern

day IT park. More than 80 percent of the country's software exports happened out

of SEEPZ, Mumbai in 1980s.[12]

Future Outlook

The Indian IT market currently focuses on providing low cost solution in the

services business of global IT. Presence of Indian companies in the product

development business of global IT is very meagre, however, this number is slowly

on the raise. US giants that outsource work to India, do not allocate the high end

15

SDLC (Software Development Life Cycle) processes like requirement analysis,

high level design and architectural design, although some Indian IT players have

enough competency to take up and successfully complete these high level software

jobs. The other prominent trend is, IT jobs, that were earlier confined to Bangalore,

are slowly starting to experience a geographical diffuse into other cities like

Chennai, Hyderabad and Pune. The growth is not fast paced, this, can be largely

attributed to the lethargic attitude of the government in providing proper

telecommunication infrastructure. The penetration levels are higher for mobile,

but, the speed at which the backbone infrastructure works (network speed) and the

coverage it offers are far below what other countries of the world have currently in

offer.

The Indian Advantage

The above listed views might possibly work against India’s’ dream to become the

biggest contributor to world IT business, but, if there is one factor that is particular

only to India, and, the one that can nullify all negative factors lined up against it,

would be, the volume of young, English speaking talent pool that India has got to

offer. This number far exceeds, any other country can generate in the coming

years. It cannot be denied that China is gearing up to reduce the English fluency

gap, but, at the same time, doing it with ease like India, is a topic of discussion.

From Services to Product Orientation

The migration of Indian IT companies to mainstream product development is not

happening any time in the near future, this, primarily can be attributed to the fact

that was discussed in earlier section, which is, lack of innovation culture amongst

the top hierarchy of the firm, and, less availability of skilled management

16

graduates in the country. However, what might possibly happen is, global

multinationals that are currently outsourcing services and back office jobs to India,

might outsource more of higher level jobs in SDLC (Software Development Life

Cycle) like requirement analysis and architecture design. The other opportunity is,

Indian subsidiaries of global multinationals might take up significant chunk of the

product development than what they are currently doing, this, however, is not

happening currently because, the global IT firms are still not comfortable in

working out a way to extract high end work from Indian companies.

Research and Development- The new drivers

The research in the industry was earlier concentrated towards programming

technologies like Java, in the recent times, the research focus changed towards

technologies like mobile computing, cloud computing and software as a service.

This shift is attributed to preference of clients towards the ubiquitous computing

over standalone computing and the growing demand for low cost computing

solutions.

17

CHAPTER 4

INDIAN SECURITIES MARKET

PRIMARY MARKET

The primary market is that part of the capital markets that deals with the issue of

new securities. Companies, governments or public sector institutions can obtain

funding through the sale of a new stock or bond issue. This is typically done

through a syndicate of securities dealers. The process of selling new issues to

investors is called underwriting. In the case of a new stock issue, this sale is

a public offering. Dealers earn a commission that is built into the price of the

security offering, though it can be found in the prospectus. Primary markets create

long term instruments through which corporate entities borrow from capital

market.

Features of primary markets are:

This is the market for new long term equity capital. The primary market is the

market where the securities are sold for the first time. Therefore it is also called

the new issue market (NIM).

In a primary issue, the securities are issued by the company directly to

investors.

The company receives the money and issues new security certificates to the

investors.

Primary issues are used by companies for the purpose of setting up new

business or for expanding or modernizing the existing business.

18

The primary market performs the crucial function of facilitating capital

formation in the economy.

The new issue market does not include certain other sources of new long term

external finance, such as loans from financial institutions. Borrowers in the new

issue market may be raising capital for converting private capital into public

capital; this is known as "going public."

Secondary market

The secondary market, also known as the aftermarket, is the financial market

where previously issued securities and financial instruments such as stock, bonds,

options, and futures are bought and sold. The term "secondary market" is also used

to refer to the market for any used goods or assets, or an alternative use for an

existing product or asset where the customer base is the second market (for

example, corn has been traditionally used primarily for food production and

feedstock, but a "second" or "third" market has developed for use in ethanol

production). Stock exchange and over the counter markets.

With primary issuances of securities or financial instruments, or the primary

market, investors purchase these securities directly from issuers such as

corporations issuing shares in an IPO or private placement, or directly from the

federal government in the case of treasuries. After the initial issuance, investors

can purchase from other investors in the secondary market.

The secondary market for a variety of assets can vary from loans to stocks, from

fragmented to centralized, and from illiquid to very liquid. The major stock

exchanges are the most visible example of liquid secondary markets - in this case,

for stocks of publicly traded companies. Exchanges such as the New York Stock

Exchange, Nasdaq and the American Stock Exchange provide a centralized, liquid

19

secondary market for the investors who own stocks that trade on those exchanges.

Most bonds and structured products trade “over the counter,” or by phoning the

bond desk of one’s broker-dealer. Loans sometimes trade online using a Loan

Exchange

MONEY MARKET

As money became a commodity, the money market became a component of

the financial markets for assets involved in short-term borrowing, lending, buying

and selling with original maturities of one year or less. Trading in the money

markets is done over the counter and is wholesale. Various instruments exist, such

as Treasury bills, commercial paper, bankers' acceptances, deposits, certificates of

deposit, bills of exchange, repurchase agreements, federal funds, and short-

lived mortgage-, and asset-backed securities.[1] It provides liquidity funding for

theglobal financial system. Money markets and capital markets are parts

of financial markets. The instruments bear differing maturities, currencies, credit

risks, and structure. Therefore they may be used to distribute the exposure.

The money market consists of financial institutions and dealers in money or credit

who wish to either borrow or lend. Participants borrow and lend for short periods

of time, typically up to thirteen months. Money market trades in short-

term financial instruments commonly called "paper." This contrasts with

the capital market for longer-term funding, which is supplied by bonds and equity.

The core of the money market consists of interbank lending—banks borrowing and

lending to each other using commercial paper, repurchase agreements and similar

instruments. These instruments are often benchmarked to (i.e. priced by reference

to) the London Interbank Offered Rate (LIBOR) for the appropriate term and

currency.

20

Finance companies typically fund themselves by issuing large amounts of asset-

backed commercial paper (ABCP) which is secured by the pledge of eligible assets

into an ABCP conduit. Examples of eligible assets include auto loans, credit card

receivables, residential/commercial mortgage loans, mortgage-backed

securities and similar financial assets. Certain large corporations with strong credit

ratings, such as General Electric, issue commercial paper on their own credit.

Other large corporations arrange for banks to issue commercial paper on their

behalf via commercial paper lines.

In the United States, federal, state and local governments all issue paper to meet

funding needs. States and local governments issue municipal paper, while the US

Treasury issues Treasury to fund the US public debt:

Trading companies often purchase bankers' acceptances to be tendered for

payment to overseas suppliers.

Retail and institutional money market funds

Banks

Central banks

Cash management programs

Merchant banks

CAPITAL MARKETS

Capital markets are financial markets for the buying and selling of long-

term debt or equity-backed securities. These markets channel the wealth of savers

to those who can put it to long-term productive use, such as companies or

governments making long-term investments.[1]Financial regulators, such as the

UK's Bank of England (BoE) or the U.S. Securities and Exchange

21

Commission (SEC), oversee the capital markets in their jurisdictions to protect

investors against fraud, among other duties.

Modern capital markets are almost invariably hosted on computer-based electronic

trading systems; most can be accessed only by entities within the financial sector

or the treasury departments of governments and corporations, but some can be

accessed directly by the public.[2]There are many thousands of such systems, most

serving only small parts of the overall capital markets. Entities hosting the systems

include stock exchanges, investment banks, and government departments.

Physically the systems are hosted all over the world, though they tend to be

concentrated in financial centres like London, New York, and Hong Kong. Capital

markets are defined as markets in which money is provided for periods longer than

a year.[3]

A key division within the capital markets is between the primary

markets and secondary markets. In primary markets, new stock or bond issues are

sold to investors, often via a mechanism known as underwriting. The main entities

seeking to raise long-term funds on the primary capital markets are governments

(which may be municipal, local or national) and business enterprises (companies).

Governments tend to issue only bonds, whereas companies often issue either

equity or bonds. The main entities purchasing the bonds or stock includepension

funds, hedge funds, sovereign wealth funds, and less commonly wealthy

individuals and investment banks trading on their own behalf. In the secondary

markets, existing securities are sold and bought among investors or traders, usually

on an exchange, over-the-counter, or elsewhere. The existence of secondary

markets increases the willingness of investors in primary markets, as they know

they are likely to be able to swiftly cash out their investments if the need arises.[4]

22

A second important division falls between the stock markets (for equity securities,

also known as shares, where investors acquire ownership of companies) and

the bond markets(where investors become creditors)

23

CHAPTER 5

ROLE OF IT IN STOCK EXCHANGE

INFORMATION TECHNOLOGY’S ROLE TO REGULATE STOCK

MARKET

In the 21st century the business world is marked by drastic changes. These changes

are paced by continuous innovations in computer & telecommunicating

technologies. The choice of a relevant IT is a crucial decision as it is bound to have

a long term & lasting impact on the future of the enterprise. Up-gradation of

technology helps in increasing productivity, reducing cost & in improving total

quality. IT is being helpful & has a great impact in business.

IT can help to identify the critical areas for competitive advantage of business

organization.

Competitive advantages may be achieved by various techniques is business with

the help of IT.

Helps in managing strategic alignment of critical business process.

Decision-making and operational control by managers has been improved by IT.

IT can help in maintaining the changing relationship with customers, suppliers,

trials, potential new entrants, etc.

IT in business results in improved communication, decreased costs, reducing

decision making time, monitoring the competitors and better control on

transaction.

24

IT can be used as innovation in functioning of the complete business system

during strategic business planning.

IT is helpful in increasing the speed of flow of trade, reducing paperwork &

emergence of global financial system.

INFORMATION TECHNOLOGY (IT) SHAPING INDIAN STOCK

MARKET

Traditionally stock trading is done through stock brokers, personally or through

telephones. As number of people trading in stock market increase enormously in

last few years, some issues like location constrains, busy phone lines, miss

communication etc start growing in stock broker offices. Information technology

(stock market software) helps stock brokers in solving these problems with online

stock trading. It is an internet based stock trading facility. Investor can trade shares

through a website without any manual intervention from stock Broker. In this case

these online stock trading companies are stock broker for the investor. They are

registered with one or more Stock Exchanges. Mostly online trading websites in

India trades in BSE and NSE. Installable Software Based Stock Trading Terminals

and Web (Internet) Based Trading Applications are two different type of trading

environments available for online equity trading.

ROLE OF DEMAT

In India, shares and securities are held electronically in a Dematerialized (or

"Demat") account, instead of the investor taking physical possession of certificates.

A Dematerialized account is opened by the investor while registering with

an investment broker (or sub-broker). The Dematerialized account number is

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quoted for all transactions to enable electronic settlements of trades to take place.

Every shareholder will have a Dematerialized account for the purpose of

transacting shares.

Access to the Dematerialized account requires an internet password and a

transaction password. Transfers or purchases of securities can then be initiated.

Purchases and sales of securities on the Dematerialized account are automatically

made once transactions are confirmed and completed.

GOAL

India adopted the Demat System for electronic storing, wherein shares and

securities are represented and maintained electronically, thus eliminating the

troubles associated with paper shares. After the introduction of the depository

system by the Depository Act of 1996, the process for sales, purchases and

transfers of shares became significantly easier and most of the risks associated with

paper certificates were mitigated.

BENIFITS

The benefits of demat are enumerated as follows:

Easy and convenient way to hold securities

Immediate transfer of securities

No stamp duty on transfer of securities

Safer than paper-shares (earlier risks associated with physical certificates such

as bad delivery, fake securities, delays, thefts etc. are mostly eliminated)

Reduced paperwork for transfer of securities

Reduced transaction cost

No "odd lot" problem: even one share can be sold

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Change in address recorded with a DP gets registered with all companies in

which investor holds securities eliminating the need to correspond with each of

them separately.

Transmission of securities is done by DP, eliminating the need for notifying

companies.

Automatic credit into demat account for shares arising out of bonus/split,

consolidation/merger, etc.

A single demat account can hold investments in

both equity and debt instruments.

Traders can work from anywhere (e.g. even from home).

Benefit to the company

The depository system helps in reducing the cost of new issues due to lower

printing and distribution costs. It increases the efficiency of the registrars and

transfer agents and the secretarial department of a company. It provides better

facilities for communication and timely service to shareholders and investors.

Benefit to the investor

The depository system reduces risks involved in holding physical certificates, e.g.,

loss, theft, mutilation, forgery, etc. It ensures transfer settlements and reduces

delay in registration of shares. It ensures faster communication to investors. It

helps avoid bad delivery problems due to signature differences, etc. It ensures

faster payment on sale of shares. No stamp duty is paid on transfer of shares. It

provides more acceptability and liquidity of securities.

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Benefits to brokers

It reduces risks of delayed settlement. It ensures greater profit due to increase in

volume of trading. It eliminates chances of forgery or bad delivery. It increases

overall trading and profitability. It increases confidence in their investors.

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CHAPTER 6

The evolution of stock market technology

Technology has contributed to a bang and a crash at the London Stock Exchange

and created an invisible world where billions of pounds changes hands in

milliseconds. But with EU red tape altering the financial sector's landscape,

technology's evolutionary journey at the London Stock Exchange is far from over.

Nestling in Paternoster Square in the shadow of St Paul's Cathedral, the London

Stock Exchange, which makes its money through charging investors fees for

trading shares and selling market data, is a technology pacemaker.

For a trading venue, the faster and more efficiently it can carry out a deal and the

more up to date information it can store and retrieve, the more attractive it is to

investors. These investors want to buy or sell shares quickly, to prevent changes in

price during the transaction. Accurate market data is also important for investors to

make informed choices.

Share trading took centre stage almost 300 years after share prices were published

twice a week on a 10-by-4-inch sheet of paper and distributed from Jonathan's

Coffee-house in London. The year 1986 saw what is known as the financial

sector's Big Bang.

It was the end of October 1986 when the Stock Exchange Automated Quotation

system replaced the trading floor. This screen-based quotation system was used by

brokers to buy and sell stock rather than meeting face to face.

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Technology's major impact

The shortening of the period between a trade being initiated and complete, or the

reduction of latency as it is known, is the ultimate aim of any stock exchange

worth its salt.

The Big Bang of 1986 did this and more. "It brought significant benefits to both

institutional and private investors, with private investors gaining low-cost

independent access to the market through the proliferation of new services," says

Robin Paine, chief technology officer at the London Stock Exchange.

Cheap and efficient trading is what securities traders wanted and that is what they

got. Volumes transacted saw unprecedented increases, with the average daily

number of trades going through the ceiling.

The trading floor where dealers met remained, and was used in emergencies while

the technology was in its infancy. However, this soon became a thing of the past as

electronically-generated trading volumes rose unabated.

Just before the Big Bang's meteoric impact, the average number of daily trades at

the London Stock Exchange was 20,000, amounting to about £700m worth of

shares changing hands. After the introduction of automated trading the figure went

up to a daily average of 59,000 trades a few months later.

In 1987 the London Stock Exchange was transacting as much business in a month

as it did in a whole year before 1986, with an average daily value of £1bn. Today,

the average daily number of shares traded is 566,000, with an average daily value

of £16.6bn.

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These figures would be impossible to reach without technology that can reduce the

time taken to complete a deal and handle massive volumes.

"Without technology, exchanges could not accommodate the increased transaction

flows that are generated both by the proliferation of end investors, and by

electronic trading, algorithms and low latency," says Bob McDowall, analyst at

TowerGroup.

The stock market crash

But the technological transformation was not plain sailing. No major technological

advance with such a deep impact on how an industry operates can be introduced

without a hitch.

This was no exception, and the stock market crash of 20 years ago that saw share

prices plummet was more than a hitch, and was partly a result of the immaturity of

the new technologies introduced in the Big Bang.

Trading in certain stocks could not be stopped and spiralled out of control.

Eventually stocks across the world lost billions of pounds in value, and the London

Stock Exchange lost 23% of its value in a single day.

McDowall says that although technology and the automation of selling did not

cause the 1987 crash, technology did contribute to the velocity of the fall in share

prices.

"The technology at that time lacked refinement to react to a wider range of factors

beyond the share prices themselves," he says.

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Technology went through a quick facelift after the City woke up the morning after

1987's Black Monday.

McDowall said the exchange had to introduce circuit breakers very quickly into the

markets. These limited the velocity at which share prices could fall, before a halt

was called to trading in the particular stock.

Algorithmic trading

These circuit breakers became more important with the proliferation of algorithmic

trading. It is not humanly possible to manually transact the number of trades done

on the stock exchange today. To reach these levels there must be a certain level of

automation. Hence computers are today initiating many trades using algorithms.

Algorithmic trading, or "algo trading" as it is known in the financial sector, relies

on computer systems to buy shares automatically when predefined market

conditions are met.

This method of trading is the future, says Paine. "The markets will continue to be

further digitised with the proliferation of algorithms set to increase. About half of

all volume on the exchange now is electronically generated and we believe this

trend will continue."

The rest is generated by manual intervention where traders submit orders using an

interactive screen.

Jonas Rodny, senior communications manager at the Nordic Exchange, said

although it is difficult to be precise about levels of algorithmic and automated

trading at the exchange, these are responsible for a significant amount of

transactions.

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"Our assumption is that both algorithmic and automated trading are growing very

rapidly, currently accounting for at least a fifth of the overall trading volume on the

Nordic Exchange and possibly quite a lot more," he says.

The Nordic Exchange was created in 2006 by integrating the exchanges in

Stockholm, Copenhagen, Helsinki, Iceland, Tallinn, Riga and Vilnius. OMX

operates the Nordic Exchange and has a technology arm that develops technology

for the exchange as well as licensing technology out to others.

The London Stock Exchange

Given the technological advancement in the 1980s and the resulting

metamorphosis of the London Stock Exchange, it is no surprise that the company

takes technology so seriously.

In 2003 the exchange instigated its Technology Roadmap, and after four years the

exchange's all-singing, all-dancing core trading platform Tradelect was launched.

Since its July launch the platform has set record after record in terms of the

volumes and the values traded. In August this year the exchange processed a

record £17.62bn of transactions in one day on Tradelect.

But there is no time to sit back and watch in a sector where technological

innovation can so dramatically impact a company's financial performance.

Constant innovation is essential if the exchange is to be able to compete with an

increased number of trading venues. To this end the London Stock Exchange's

Technology Roadmap II has already been initiated.

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Rodny said the Nordic Stock Exchange's heritage is built on technological

innovation, and the challenges it faces are twofold. Exchanges need to be able to

provide sufficient latency to support more regular and faster trading, which allows

investors to take market opportunities more quickly.

"The other key challenge arises from the fact that the continuous increase in

volumes puts further constraints on capacity, not just at exchange level, but along

the entire transaction chain," says Rodny.

The future of European exchanges

Recent forces driving innovation at the exchanges across Europe stem from the

European Union's Markets in Financial Instruments Directive (Mifid). This piece

of pan-European red tape has introduced more competition in the stock trading

sector.

Mifid has compelled EU nations to remove what is known as the concentration rule

that states that all trades must go through local exchanges. This has been the case

for some time in the UK, but now it is happening across Europe and will inevitably

lead to the creation of more alternative trading and reporting venues.

Two projects known as Boat and Turquoise have been created to offer trade

reporting and execution facilities, respectively, on the back of Mifid. Turquoise

was set up by Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, Merrill

Lynch, Morgan Stanley and UBS as an alternative trading venue, while Boat was

developed by a consortium including many of the above-mentioned banks to offer

a trade reporting venue.

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KPMG consultant Lee Epstein says Mifid has opened up the stock trading and

reporting sector to new players because it becomes more attractive for them to be

able to work across Europe. "Before this you had so many different rules across

Europe it was difficult," he says.

A fragmented market

He says the introduction of alternative trade execution and reporting venues

following Mifid will fragment the market, and technology will be important to

differentiate venues.

Nemone Wynn-Evans, head of market development at UK-based exchange Plus

Markets, says innovation will focus on succeeding in an increasingly fragmented

market which increases competition and introduces new challenges.

"The impact of fragmentation and the lowering of transaction costs will mean huge

volume increases in transaction data, and in particular market data," says Wynn-

Evans .

Technical innovation is required to be able to use all this data to optimise trades,

she says. "The challenge of data volumes is not just an issue for investors, but also

for surveillance functions and regulators."

Plus Markets, which is a Recognised Investment Exchange in the UK, is currently

installing new trading and market surveillance technology in conjunction with

OMX to expand its stock coverage and enable algorithmic trading.

McDowall agrees that continuous innovation is essential. "It is an important factor

if it provides business innovation combined with greater efficiency, speed of

execution and reduction in costs."

35

Rodny says innovation around speed, capacity and flexibility are important.

"Capacity to take care of the increased volumes, speed in order to provide algo

trading and flexibility to be able to integrate trading across asset classes and across

markets."

So in a computerised environment where high speed, high volume trading is

critical, technology has a strong hand to play.

Add to this the need to retain massive amounts of data and be able to access it

efficiently and you have a boardroom that appreciates the value of technology and

will not shy away from investing in it.

The London Stock Exchange is an example of how a centuries-old organisation

can meet today's business challenges through an acute focus on technology

innovation.

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CHAPTER 6

MODERN TRENDS OF IT IN INDIA

The help of online database on both national and international information can be

accessed which he valuable tool for making decisions. Expansion of e-commerce,

e-business, m-commerce etc has emerged as a sunrise market for the software

industry business. The modern trends of IT in India are as follows:

E-commerce

Electronic Commerce is doing business online or selling and buying products &

services through Web storefronts. The use of computer is a primary tool to perform

basic business operations. The Internet is the primary communication mode for

electronic commerce. To provide foundation to this commerce, the electronic data

interchange (EDI) is a strategically means. Thus, the business transactions between

customers and suppliers, and all operations of a firm are facilitated. The functional

areas covered by it are: finances, information services, human resources,

manufacturing, and marketing. Electronic business also requires the firm’s

interaction with the environmental parties such as government, competitors, labour

unions etc. E-commerce has opened several new avenues of employment and

progress. This new offspring is a blend of commerce, electronics and management.

If electronic means are applied to commerce, the efficiency of commerce enhances.

Here electronic imply the internet. In pursuing commerce, various technical

methods like middleware, than section server etc., are emphasized upon instead of

conventional methods of 'ordering', 'payment' etc. Also for efficient use of

electronics, the knowledge of various software e.g., Java Beans, Servlet, COM/d,

Com etc are required.

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M–Commerce

M- Commerce (M-Com) is a type of e-commerce that enables the users to access

the internet through handheld wireless devices. Buying & selling, the services are

accomplished by means of cellular phones, personal data assistants such as palm

pilots and their combination. The emerging technology that has made m-commerce

as an advanced business mode is WAP (Wireless Application Protocol). It utilizes

the mobile handset devices equipped with web-ready micro- browsers. M-

Commerce has a great market potential due to its faster and more secured wireless

working as compared to the working of wire line e-commerce. It saves time and

money. It is quick and safe also due to mobile speed passwords. For example, in

mobile banking, the customers can access their accounts through handheld devices

from anyplace. They need not sit in front of their computer (having Internet

connectivity). They can pay their bills, can see the stock quotations and trading and

can acquaint themselves with any desired information from anywhere. They can

even know about traffic bottlenecks, if any, in their movement way.

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CHAPTER 7

STOCK TRADING AND INFORMATION TECHNOLOGY REVOLUTION

Information technology has made a tremendous development in respect of our

approach at a mass level. It opens the door of several avenues as well as has

brought in several threats, which should be analyzed carefully. Due to development

in technology, the information can be transferred from one place to another in very

short span of time, earlier which required lot of time. Transfer of large information

and storing capacity for a long period also has some draw backs, inherent in the

process itself. For example, manipulation of message is very easy and it requires

small level of technical literacy. It is also observed that master in a subject may not

be many times able to express his views effectively as compared to a person having

less knowledge of subject but more computer literacy, who can make better

presentations. Here, the knowledge part of the core subject has been compromised

with proficiency with technology. Whole economy of the world is very much

dependent upon the technological advancement. This increased competition in

each segment of the market. The Internet makes the stock exchange accessible in

the global market. Being more accessible will give them the opportunity to pick up

a bigger market share, and give them a greater market value. There has been a

migration from a Screen based trading system for government securities to an

order matching system so as result in better price discovery and more transparency

in the market related transactions in government securities Negotiated Dealing

System (NDS)- which has been in use for many years now, has been enhanced to

provide for changing market and regulatory requirements. Clearing Corporation Of

India Ltd., (CCIL) as a fully IT enabled entity providing for electronic transaction

processing as well as reporting has enabled the market to grow in depth and

39

coverage as well. Use of the Multi-Lateral Net Settlement Batch facility for

effecting the settlements arrived at by various clearing systems (such as the Stock

Exchanges), through the RTGS mode Pilot projects entailing the use of Multi

Application Smart cards have not only yielded satisfactory results; their usage for

financial inclusion has opened up new vistas for their wide spread use across the

country. Use of credit transfer based RTGS transactions by brokers, constituents

etc. pertaining to the funds leg of secondary market transactions. To provide an

interactive and user friendly service, banks and financial institutions have adopted

the most recent technological trends. Queuing at banks is a thing of the past; now-

a-days customers can enjoy various facilities at the doorstep of their banks and at

other locations. Phone banking and SMS banking services can also keep customers

updated with the status of their money, investments and offer an array of additional

services. TRENDS AND OPERATIONS IN SECURITIES MARKET Year 2010-

11 belongs to activities in primary market -which witnessed record number of

Initial Public Offerings (IP0s)/ Follow-on Public Offerings (FPOs) and new debt

issues (Non- Convertible Debentures/ Bonds) including the biggest ever IPO of

Coal India which came out with issue size of Rs. 15,199.4 crore in October 2010.

In debt segment, State Bank of India, the country's largest bank, came out with

debt issues in multiple trenches which were subscribed by investors multiple times.

Secondary market segment showed signs of recovery of Indian corporate from

global financial crises witnessed in 2008. The recovery phase was clearly reflected

in substantial increase in average market capitalisation, revenues and profit after

tax of top 500 listed companies at NSE and BSE. With growth in domestic demand

being intact, Indian companies also showed significant improvement on export

front in 2010-11 despite the fact that the global economy is still recovering from

financial crises. The cumulative value of exports for the period from April, 2010 to

March 2011 to US $ 245.8 billion (Rs. 11,18,822.8 crore) as against US $ 178.7

40

billion (Rs. 8,45,533.6 crore) registering a growth of 37.5 per cent in Dollar terms

and 32.3 per cent in Rupee terms over the same period last year. During 2010-11,

Foreign Institutional Investors (FIIs) made record investments of Rs. 1, 46,438

crore in the Indian market (equities and debt combined) surpassing the previous

high of 2009-10 net investments of Rs. 1, 42,658crore. This reflects their

confidence in Indian securities market and better growth potential of Indian

1 Installable Software Based Stock Trading Terminals

These trading environments require software to be installed on investor’s

computer. This software is provided by the stock broker. This software requires

high speed internet connection. These kind of trading terminals are used by high

volume intraday equity traders.

Orders directly send to stock exchanges rather than stock broker. This makes

order execution very fast.

It provide almost each and every information which is required to a trader on a

single screen including stock market charts, live data, alerts, stock market news

etc.

Web (Internet) Based Trading Applications

This kind of trading environments doesn’t require any additional software

installation. They are like other internal websites which investor can access from

around the world through normal internet connection such as:

Real time stock trading without calling or visiting broker’s office.

41

Display real time market watch, historical data, graphs etc.

Investment in IPOs, mutual funds and bonds.

Check the trading history; demat account balance and bank account balance at

any time.

Provide online tools like market watch, graphs and recommendations to do

analysis of stocks.

Place offline orders for buying or selling stocks.

Set alert to inform you certain activity on the stock through email or sms.

Customer service through email or chat.

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CHAPTER 8

FUTURE GROWTHOF INDIAN ECONOMY AND STOCK MARKET

The future of Indian stock market is heavily dependent upon the following three

parameters, which are discussed in the sub-sections given below: Future growth of

the Indian economy, annual inflation, and productivity related improvements.

The in-flow and out-flow of Foreign Institutional Investment.

Any movements of price-earnings ratios. India's economy grew at an annual rate

of from 9% to 10% last five years from 2005-2010; during the agriculture

averaging around 5% per year. India also survived from the Great Recession of

2008-09 due to minimal exposure of financial sector to sub-prime lending and

domestic demand driven growth. According to our estimates, its economy's

average annual growth rate during the two years, 2008-10, is likely-to be around

7% (in real terms), with the current fiscal year outperforming the last one by over 1

%. Favorable demographics, high savings rate, rising middle class, and

underleveraged households suggest that domestic demand, and the economy, will

continue to grow strongly. Taking a long-term view and assuming an exchange rate

of 46 INR to 1 USD, an annual growth rate of 7% in 2009-10 and 8.5% during

2010-11, the market sentiment being overly buoyant, an inflation of 6% per year,

the size of the Indian economy in nominal terms is likely to be USD 1,250 billion

in 2009-10, USD 2,400 billion in 2014-15, and USD 4,640 billion in 2019-20. This

implies a cumulative nominal annual growth of 14% and an approximate four-fold

increase in the coming decade. During 2009-10, the hi-tech services and products

include information technology (IT) and application development, business process

outsourcing (BPO), knowledge process outsourcing (KPO), drug research and

43

clinical research outsourcing (CRO), engineering services outsourcing (ESO),

software and solutions related to the consumer Internet, software as a service

(SAAS), open source, software services, and telecommunications (both wireless

and wire-line) products and services are expected to grow at an annual rate of 17-

18% annually. There would be considerable fluctuations in the growth rates over

the years and within the sub-components of each group, but each group would

continue to claim an important place in dictating the SENSEX level. Since

productivity in Public Sector Undertakings (i.e., PSUs or companies where the

federal and state governments own more than 50% equity) and family owned

businesses has improved at a very fast pace, these two sectors have become

particularly important for the investing community. For example, Evalueserve's

analysis shows that on an average, the productivity improvement for the 500

companies listed in BSE-500 was approximately 8% per year during 2005-2011,

and it was more than 10% per year for most family-owned businesses. These

improvements were mainly driven by penetration of IT in all sectors and

management and organizational innovations. For PSUs that are listed in the Indian

stock markets, productivity improvements were significantly higher. For example,

during March 2005, the average net profit per employee for the PSUs that are a

part of BSE-PSU index vent up from USD 1,000 per employee to USD 11,500 per

employee and the average revenue per employee went up 8 times during the

period. Although these figures are quite impressive, according to our estimates, an

additional 80% in productivity improvements would occur during 2005-15 on an

average for a typical firm listed in the Indian stock markets. Clearly, such an

improvement of 6% a year by itself would not increase the valuations of these

firms since the productivity of other good competitors would proportionately also

increase. Nevertheless, such a productivity increase would help these firms

compete more effectively in a global market place.

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CHAPTER 9

Development of Securities Market

A satisfactory pace of economic growth in any economy is contingent

upon availability of adequate capital. A well-developed securities market, while

acting as provider of funding for economic activity at macro level, plays the

specific roles in an economy, viz., diffusing stress on the banking sector by

diversifying credit risk across the economy; supplying funds for long-term

investment needs of the corporate sector; providing market-based sources of

funds for meeting government’s financing requirements; providing products

with flexibility to meet the specific needs of investors and borrowers; and

allocating capital more efficiently.

The main impulse for developing securities markets, including both

equity and debt segments, depends on country-specific histories and more

specifically, in the context of the financial system, it relates to creating more

complete financial markets, avoiding banks from taking on excessive credit, risk

diversification in the financial system, financing government deficit, conducting

monetary policy, sterilizing capital inflows and providing a range of long-term

Assets. Prior to the early 1990s, most of the financial markets in India faced

controls of pricing, entry barriers, transaction restrictions, high transaction costs

and low liquidity. A series of reforms were undertaken since the early 1990s so as

45

to develop the various segments of financial markets by phasing out administered

pricing system, removing barrier restrictions, introducing new

instruments, establishing institutional framework, upgrading technological

infrastructure and evolving efficient, safer and more transparent market

practices.

Against this backdrop, this paper essentially brings to the fore the

evolutionary process that has occurred in the securities markets in India along

with an assessment of the impact of reform. Following this introduction, section

II and III set out the developments in corporate equity and debt markets,

respectively. Section IV discusses the developments in the Government securities

market. The paper concludes with a broad assessment of the developments in the

securities markets and outlines the way forward for bringing the Indian

securities market on par with international counterparts.

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CHAPTER 10

Conclusion

Companies come to the stock market in a variety of different ways and for

a variety of reasons.

As a private investor, you can sometimes get an allocation of newly-issued

shares, but often the issue will be confined to institutional investors. With

internet shares, and the movement towards direct online IPOs, this may

change for the better.

Most of the time you will be trading in a company's ordinary shares on

the secondary market.

Companies issue other types of share - notably preference shares,

convertibles, and warrants - and even if you don't own them they may have

an effect on your dividend entitlement if they dilute earnings.

A scrip issue is designed to improve marketability of ordinary shares, and

does not dilute your ownership.

A rights issue is designed to raise more money for the company, and

existing shareholders will be invited to buy first. You have a choice about

whether to exercise your rights, but if you do not, your ownership may be

diluted.

47